There
is no doubt, Iran has a lot of potential. It is a country that boasts a
domestic market of 65 million people, 93 billion bbl or approximately 9% of the
worldís proven oil reserves, 21 trillion cubic meters or 15% of the worldís
proven gas reserves, 11 petrochemical complexes producing 13% of the Persian
Gulf regionís petrochemical output, major deposits of copper (2nd
largest in the world), iron ore (9th), zinc (1st) and
much more.

However,
the big question for foreign companies is how to turn this potential into
concrete business.

Foreign
companies that have experienced Iran can tell you many stories that are partly
funny, partly sad. The common theme in all these stories is that Iran is, in
many ways, different from other markets; business is usually difficult, time
consuming and at times downright nerve wracking.

Frequently
the reason behind all these problems is that the foreign company did not pay
enough attention to the legal and administrative side of its business in Iran
from the very start.

Every
foreign company is in a different situation and there is no one, universally
applicable rule on how to start and to develop business in Iran. That said,
this article provides some advice for small and medium size companies on how to
successfully enter the Iranian market with low initial investment requirement.

Some
general recommendations should be given upfront: Take one step at a time!
Donít try to build your business over night. Keep your expenses low in the
beginning, test the market and donít believe those who swear they can perform
miracles and get you into business in a blink of an eye (no matter whom they
claim to know).

STEP
1: SHOW YOUR COMMITMENT

In
the past few years, Iran and Iranian managers have seen many foreign
businessmen and export managers, coming on their own or in the framework of a
business delegation, trying to win business here. They usually bring a lot of
shiny catalogues and send various follow-up faxes from far abroad.

Doing
business in the Middle East and especially in Iran means you have to show
commitment. Such commitment can be displayed in many ways: by investing heavily
in business development, by immediately setting up a large office, by jetting
back and forth a senior manager to Iran every two weeks to follow-up of
developments, etc. However, the above strategies translate into spending a lot
of money immediately, without knowing when the first contract can be signed.
Such a strategy might be appropriate for large, resource-rich companies, but
not for small and medium size firms.

A
better strategy is showing commitment by registering a subsidiary in one of
Iranís Free Trade Zones.

Iran
has three Free Trade Zones: Chabahar (port city close to Pakistan), Kish
(island in the Persian Gulf) and Qeshm (island in the Strait of Hormoz).

Registering
a company in Iran gives the Iranian side a clear sign that you are serious
about doing and developing business in Iran and you have not just come for a
quick look.

Registering
a company in the Free Trade Zone has the following advantages compared to
registering a company in Tehran:

∑Low Operating Costs: You can rent a registration address in the Free Trade Zones for US$
100/month or for US$ 300/moths including secretarial, telephone answering and
fax forwarding service.

∑No Taxes: As soon as you open an office in Tehran the taxman is at your door. The
Iranian tax system is arbitrary and the fact that you have not signed any
contract yet, will not keep you from facing a big tax bill. The Free Trade
Zones offer 15 year tax exemption on income and assets and you can be sure that
no-one from the tax office will ever disturb you.

STEP
2: FIRST CONTRACTS

With a
successful strategy, usually after a few month of business development you
should be close to signing your first contracts. Iranians are tough negotiators
and you can be sure that they will press you hard to reduce your prices to the
absolute minimum. However, when having a Free Trade Zone registered company,
you will have two substantial advantages over your foreign competitors:

∑Invoicing: Most Iranian companies have plenty of Iranian Rials, but little or no
foreign currency. They have a hard time importing foreign products and
services. In the past they were getting subsidised US$ from the Central Bank.
However, the Iranian government has changed its policy. On the one hand they
give Iranian companies much more freedom in developing contacts with foreign
companies, but on the other hand, Iranian companies have to earn hard currency
themselves. In practice this means that only Iranian companies that export have
a chance to import for US$. A Free Trade Zone registered company can invoice
Iranian companies in Rials. The Rials can then be exchanged at the Free Market
Rate through private exchange offices in the Free Trade Zones into US$ and be
transferred to any account outside Iran. This process is completely, 100%
legal.† Meanwhile, allowing your Iranian
client to pay in Rials gives you a big advantage over your competitors.

∑Letter of Credit: Iranian companies can only import goods via letters of credit. Iranian
banks are very rigid in opening l/cís and request various securities from their
clients. This does not apply to the Free Trade Zones. When your client
purchases goods or services from your Free Trade Zone registered company, no
l/c is required and you can agree on any terms and conditions of payment,
including cash in advance. This will be a big incentive to your client to
purchase from you and will shorten the entire transaction by many months.

STEP
3: BUSINESS IS PICKING UP

When
you are able to offer your goods and services in Rials and without l/c, the
word will spread fast and it is very likely that you will soon get regular
business. At this stage we recommend that your company expands as follows:

∑Rep Office in Tehran: A permanent rep office in Tehran will allow you to give your clients
much better service and to penetrate the market in a systematic way. The laws
and regulations of Iranís Free Trade Zones state that any company registered in
the Free Trade Zones can open representative offices in the Iranian mainland.
As long as they are only involved in liaison and marketing services, they are
not subject to taxation.

∑Warehouse: Once you have a proven and steady demand for your products it might
make sense to set up a permanent warehouse in the Free Trade Zones. The obvious
advantage of doing so is that you can keep a certain supply of goods that are
in high demand handy. Immediate availability as compared to one or two months
of delivery time will give you another leg-up over your competitors. This edge
is particularly advantageous in Iran since many Iranian companies tend to order
in the last minute. There are plenty of warehouses and other facilities
available for rent in the Free Trade Zones. Thus, setting up a warehouse does
not create large capital expenditures.

STEP
4: ASSEMBLY/PRODUCTION

Once
you have a high and steady demand for your product you might consider
assembling or actually producing your product in the Free Trade Zones. The
basic preconditions for successful assembly/production are:

Producing/assembling
in Iranís Free Trade Zones has the following advantages:

∑Tax
exemption for 15 years on income and assets.

∑Labour,
energy and raw materials is cheap and readily available.

∑ĎAdded-valueí regulation:† Any
value added to a product in the Free Trade Zones is exempt from import duty
when sold in the Iranian mainland. In addition, the Free Zone Organisations is
usual quite generous when determining the portion of Ďadded valueí (60% to 70%
value addition is the rule rather than the exception). This means that for part
of your production you donít have to pay any import duty, which means that even
in case you sell 100% of your products in the Iranian mainland the average
import duty decreases considerably.†

∑Maintenance: You can offer additional service to your Iranian clients by setting up
a small repair/maintenance unit. There is a clear trend among Iranian companies
to purchase only from foreign producers of machinery/ equipment that offer
repair and maintenance services inside Iran. Among others, NIOC, is presently
putting pressure on its suppliers to establish maintenance facilities in the
country.

All
four points together will give you a substantial price and competitive
advantage over your competitors.

WHAT
TO DO IF YOU WANT AN AGENT?

Some of
the advantages listed above are also available if your company chooses to work
in Iran via an Iranian agent. Usually this agent has an office in Tehran and
sells your products/services on a success fee basis.

Now, if
your company registers a subsidiary in one of Iranís Free Trade Zones, you gain
the following additional advantages when appointing a representative in Tehran:

∑You
are less dependent on your agent and can eventually build up your own business

∑You
can collect money from your clients directly and then pay your agent, rather
than hoping that your agent pays you after he has received money from the
client

CONCLUSION

As you
can see registration of a subsidiary in one of Iranís Free Trade Zones could
offer your company in any stage of business development various valuable
advantages. In addition to the privileges mentioned above, you will also
benefit from the following facilities:

Capital and profits gained from economic

activities can freely enter and exit the Free Trade Zones.

∑Labour and employment regulations are
more flexible than in the mainland.

∑In case of direct entry into the Free
Trade Zones from abroad no visa is required. (There are several flights a day
from Dubai to Kish and Qeshm.)

Goods manufactured in the Free Trade Zones can be

exported to other countries without being subject to mainland export

regulations.

Liberal banking and foreign exchange laws based

on the free market rate apply.

All
that said, registering in Iranís Free Trade Zones does not rid you of all the
obstacles in doing business in Iran. You will still face various challenges in
dealing with your Iranian clients. However, the FTZ strategy allows you achieve
a long-term advantage over your competitors and it will steer you away from
some of the day-to-day problems that make life difficult and are time-consuming
to solve.

Combining
the low costs involved and the absence of any side effects with the potential
return from the Iranian market, the risk/return ratio becomes very attractive
for foreign companies.

Finally,
those foreign companies that are amongst the first to study these new realities
will enjoy an additional success multiplicator.

Dr.
Albrecht Frischenschlager is Managing Director of FTZ Services Ltd., a joint
venture between the three governmental Free Zone Organisations of Iran and a
private London based consulting company. For further information please contact
Tel: +98 21 872 92 22, Fax: +98 21 872 00 77 or Email: albrecht@ftz-services.com.
Information is also available on the Internet www.ftz-services.com.